Large corporate-backed NBFCs, such as Bajaj Finance, L&T Financial Holdings, Aditya Birla Capital and Tata Capital, may have to deal with tighter bank-like regulations even as there is no clarity from the Reserve Bank of India (RBI) on their eventual transition into full-service banks.

On Friday, the RBI listed out the recommendations it had accepted from the internal working group (IWG) to review ownership guidelines and corporate structure for private sector banks. Analysts say NBFCs face their own challenges in terms of the rising cost of funds and higher capital requirements and a bank licence is not on the horizon for the next few years.

Prakash Agarwal, head-financial institutions at India Ratings & Research, said the arbitrage between banks and NBFCs is only going to shrink. “NBFCs now have considerable similarity on regulations with banks with the major exception of reserve ratios. This of course remains a major concern if NBFCs were to convert to banks,” Agarwal said. “NBFCs need to plan their liability structure on conversion. The retail deposit profile will build gradually and in the interim there could be large dependence on institutional funding and certificate of deposits where markets are not very deep and could also be volatile and costly.”

Banks keep 4% of their deposits with RBI without interest as cash reserve ratio and another 18% of deposits have to be invested in government securities as statutory liquidity ratio. These do not apply to NBFCs and that is why they traditionally avoided banking licences.

“There are pros and cons for NBFCs wanting to become banks. They will have to change their deposit mix away from wholesale taking into account a large repricing that happens every year. There will also be some regulatory challenges, especially with regards to reserve ratios,” said Karthik Srinivasan, group head-financial sector ratings, ICRA. “For now, the RBI has not said anything about licences to corporate groups or NBFCs so everyone will just wait for the dust to settle as they move toward a stricter regime.”

NBFC executives say the only question now needs answering is whether the regulator wants corporate houses to promote banks.